AN ANALYSIS OF THE EFFECTIVENESS OF CENTRAL BANK IN REGULATING THE BANKING SECTOR IN UGANDA BY NATUMANYA MEDRINE LLB/43807 /143/D U A RESEARCH REPORT PRESENTED TO THE SCHOOL OF LAW IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE A WARD OF BACHELORS DEGREE IN LAW OF KAMPALA INTERNATIONAL UNIVERSITY. SEPTEMBER, 2018 DECLARATION I Natumanya Medrine declare that this research report is my original work and to the best ·of my knowledge, it has never been presented elsewhere in any university or institution of learning for approval. ~ Signed .. .~~ - · · · Date _.l.q .. (. ..l.9.. (.. .?.-o '-2 NATUMANYA MEDRINE LLB/43807 /143/D U APPROVAL I, the undersigned certify that I have read and hereby recommend for acceptance by Kampala International University a research report titled, "An analysis of the effectiveness of Central Bank in regulating the banking sector in Uganda". Signed Date ..... ..t., .. ( . J.~~ MR. SEWAYA M'Qi(AMUD (SUPERVISOR) ii DEDICATION I dedicate this piece of work to the Almighty God, my Lovely parents Mrs. Joan Natuhwera Tukundane. and Mr. Tukundane Julius Nkora. iii ACKNOWLEDGEMENT I extend a vote of thanks to a number of people who unreservedly contributed towards the accomplishment of this research work. I also would like to acknowledge the assistance and role played by the following personalities to the successful completion of this study. I cannot say exactly how grateful I am to my supervisor, Mr. Sewaya Muhamud, his guidance in this study was beyond measure. Thank you also for providing me with professional advice, encouragement and your time that has spurred me to success. I also extend sincere thanks to my friends; Susan, Everlyn, Adellah, Geoffrey and Aston, and not forgetting my beloved sister; Fiona and family members for their inspirations in my studies. May the Almighty God Bless you abundantly. iv TABLE OF CONTENTS DECLARATION ............................................................................................................................. i APPROVAL ................................................................................................................................... ii DEDICATION ............................................................................................................................... iii ACKNOWLEDGEMENT ............................................................................................................. iv LIST OF ACRONYMS .................................................................................... viii CHAPTER ONE ............................................................................................................................ 1 GENERAL INTRODUCTION ..................................................................................................... ! 1.1 Background ofthe Study ......................................................................................................... :.1 1.2 Statement of the problem ........................................................................................................... 5 1.3 Research questions ..................................................................................................................... 5 1.4 Purpose of the study ................................................................................................................... 6 1.5 Objectives of the study .............................................................................................................. 6 1.6 Literature Review ...................................................................................................................... 6 1.7 Methodology .............................................................................................................................. 9 1.8 Chapterisation ............................................................................................................................ 9 CHAPTER TWO ......................................................................................................................... 11 REGULATORY FRAMEWORK OF BANK OF UGANDA .................................................. ll 2.1 lntroduction .............................................................................................................................. 11 2.2 Bank defined ............................................................................................................................ !! 2.3 Justification for Bank of Uganda Regulatory Framework ....................................................... II 2.3.1 Depositor Protection ............................................................................................................. 11 2.4 Monetary Stability ................................................................................................................... 12 2.5 Efficient and Competitive Financial system ............................................................................ 13 v 2.6 Consumer Protection ............................................................................................. ·.................. 13 2.7 Methods Used in Commercial Bank regulation and Supervision ............................................ l4 2.8 Strengthening Prudential Regulation-and Supervision ............................................................ l6 2.9 Conclusion ....................................................................................................... !& CHAPTER THREE ..................................................................................................................... 19 COMMERCIALBANK ISSUES TOWARDS REGULATING BANKING SECTOR ........ 19 3.1 Introduction .............................................................................................................................. l9 3.2 The causes of bank failure ....................................................................................................... l9 3.3 Review of Monetary Policy Frameworks ................................................................................ 20 3.4 Legal fi:amework for the operation ofbanking system in Uganda .......................................................... 22 3.5 Banking Regulation in Uganda ................................................................................................ 22 3.6 Legal Framework for the Operation of Banking System ................................ "" ..................... 23 3.7 Licensing .................................................................................................................................. 24 3.8 Legal Control of Banking Staff ............................................................................................... 26 3.9 Code of banking practice in Uganda ....................................................................................... 26 CHAPTER FOUR ....................................................................................................................... 27 BANKING REGULATORY FRAMEWORK, LIMITATIONS AND BANKING CRISES MANA G EMENT ......................................................................................................................... 2 7 4.1 Basic Principles ofRegulation ................................................................................................. 27 4.2 Limitation faced by Bank of Uganda-regulatory framework Precarious Public institutions .. 27 4.3 Principles in Managing Banking Crises ................................................................................. .31 4.4 Protecting the Payment System .............................................................................................. .31 4.5 Limiting Government Involvement in Banking ...................................................................... 32 vi 4.6 Insolvency Procedures for Banks ........................................................................................... .32 4.7 Sharing the Cost of a Crisis .................................................................................................... .32 4.8 Early Remedial Action ........................................................................................................... .33 4.9 Banking Sector Reforms .......................................................................................................... 33 4. I 0 Factors Influencing Future Regulations ................................................................................. 33 4. I I Conclusion ............................................................................................................................. 35 CHAPTER FIVE ......................................................................................................................... 36 RECOMMENDATIONS AND CONCLUSION ....................................................................... 36 5.I Study findings ......................................................................................................................... .36 5.2 Recommendations ................................................................................................................... .37 5.2.1 Clearly Defined Principles ofRegulation ............................................................................ .37 5.3 Strengthening Market Discipline ..........................................................................._. ................ .40 5.4 Avoiding Speculative Bubbles ............................................................................................... .40 5.5 Cross-border